Increased borrowing driven by households with highest debt

A new report indicates that the considerable amount of borrowing Canadians have done since 2007 to finance their expenses has been perpetuated by households that have the highest amounts of debt.

Conducted by the Canadian Imperial Bank of Commerce, the report notes that Canada's debt-to-income ratio - 151 per cent - is currently so high that only six other countries in the developed world have a larger proportion of indebted households.

"Our new analysis found that all of the rise in debt since 2007 has been driven by borrowing from those with a high debt-to-gross income ratio," said Avery Shenfeld, chief economist at CIBC and co-author of the report. "The growth in debt-to-income ratios has come from a piling on of debt by those with high debt burdens, rather than from less indebted households getting drawn to the punchbowl by the promise of low rates. Some 34 per cent of households that have debt are now in the high-debt-burden category and they account for nearly three-quarters of household debt outstanding."

While mortgage rates are low, he added that the cost of housing has been the primary driver of households with high debt-to-income ratios. As such, British Columbia, Ontario and Alberta - the three provinces where housing generally is the most expensive - have the largest percentage of individuals with significant amounts of debt. In addition, high debt burdens were particularly steep among Canadians above the age of 45, he indicated.

Shenfield further noted that this reality is unfortunate, as these people ought to be financially preparing themselves for their next phase of life.

"Canadians nearing retirement who should be in their prime savings years are, instead, getting themselves deeper into debt," he said. "We are already seeing an uptrend in bankruptcies for those 50 and over, but the more material impact will be that this group's ability to spend could be severely squeezed upon retirement."

The report also detailed the spending characteristics of borrowers with few back payments. After taking family composition and age into account, researchers found that households with lower debt-to-income ratios tended to devote more of their earnings toward saving rather than purchases.

Many people have made reducing debt a goal this year. A previous CIBC poll found 20 per cent of Ontarians said dropping their debt levels was their top financial goal this year.

While Shenfeld said he does not believe high debt burdens will lead to more household bankruptcies, consumers' inability to pay off their expenses may have an impact on the economy at large, perhaps leading to a slowdown in the real estate market.

CIBC's finding may help explain why The Conference of Board of Canada predicts that the country's economic growth will be modest at best in 2012.

In the Conference Board's Canadian Outlook report, researchers anticipate real gross domestic product to rise 2.1 per cent. A year ago, the group forecasted a growth rate of 2.3 per cent.

"Restraint by governments, households, and businesses will stifle domestic demand and curb economic growth this year," said Pedro Antunes, director of National and Provincial Forecast. "Adding further uncertainty are the sovereign debt problems in Europe and the tepid U.S. economy, which continues to perform far below its potential."